Neal Stephenson’s novel The Diamond Age takes place in a future where encrypted currencies and e-commerce have moved most economic transactions into “darknets” beyond government’s capability of monitoring and regulation, causing tax bases around the world to implode and bringing on the collapse of most nation-states.

Encrypted currencies and darknet economies have been promoted by such thinkers as David de Ugarte and John Robb as a real-world model for resilient communities in the impending age of hollow states. So you can imagine my reaction to recent news of Bitcoin, “a Peer-to-Peer Electronic Cash System.”

Jason Calacanis and his colleagues at LAUNCH describe Bitcoin as “The Most Dangerous Project We’ve Ever Seen” (May 15, 2011). Not only is it “the most dangerous open-source project ever created,” but “possibly the most dangerous technological project since the Internet itself.” It “could topple governments, destabilize economies and create uncontrollable global bazaars for contraband.”

The beauty of Bitcoin is that there’s no central server network to shut down. Bitcoin is traded from one desktop or mobile device to another via public key encryption. Short of catching and prosecuting end-users with harsh punishments — and we all know how well that’s worked out for proprietary content companies versus file sharers — there’s no way to stop it.

There are currently 6 million Bitcoins in circulation, with a total value of $40 million. Bitcoins are generated by a complicated algorithm, with the total to top out at 21 million. After that, increases in exchange of goods and services will be offset by appreciation of Bitcoins in value and deflation of Bitcoin-denominated prices.

This fixed upper limit and requirement for price deflation thereafter is one ground on which Bitcoin has been criticized. Another is that, since it’s not denominated in a familiar unit of measure like dollars, it’s confusing as an instrument of exchange for the average person.

As an alternative currency geek, I’d add the criticism that you can only engage in Bitcoin-denominated exchange if you’ve already obtained Bitcoins from previous transactions. This is definitely a downside, compared with the kinds of “mutual credit clearing networks” proposed by Tom Greco. Greco’s mutual credit isn’t a store of value from past transactions — just a measure of value for denominating exchanges of present or future goods and services. The backing comes entirely from the goods and services themselves. Like the many local barter networks that flourished during the Depression, mutual credit is a system for facilitating exchange even when there’s “no money.”

As Falkvinge argued, it’s usually not the most feature-rich version of a new technology that achieves popular acceptance. Rather, it’s the most user-friendly. “… [I]t takes about ten years from conception of a technology, or an application of technology, until somebody hits the magic recipe in how to make that technology easy enough to use that it catches on.”

Technologies for sharing digitized music had been around for ten years when Fanning came up with Napster. Geeks had been sharing videos for ten years when YouTube came along. Falkvinge thinks Bitcoin will do the same for encrypted e-currency. It’ll do to banking what BitTorrent’s doing to the music industry.

Here’s how Falkvinge describes the ramifications:

“The governments of the world are on the brink of losing the ability to look into the economy of their citizens. They stand to lose the ability to seize assets, they stand to lose the ability to collect debts. … All the world’s weapons in all the world’s police hands are useless against the public’s ability to keep their cryptographic economy to themselves. … The decentralized, uncontrollable economy where one lifetime employment is no longer central to every human being is something I’ve called the swarm economy, and I predict it will redefine society to an immensely larger extent than the ability to get rap music for free.”

This is vitally important to a central theme in my work: The emergence of non-state spaces within which the low-overhead informal and household economy can function, outside the state’s ability to impose artificial scarcities and entry barriers and collect tribute for the usurers, landlords and proprietary content owners.

Bitcoin is monumentally important. Encrypted currency has been at the Altair stage of development. If Bitcoin isn’t actually the Apple II — and it may not be — we’re still just around the corner from that level of popular adoption.

My only question has to do with the idea of governments purchasing the wealth of bitcoins. Let’s say they acquire the lot of bitcoins through market exchange. I understand that the technology is available to make something new and similar. However, if it weren’t too expensive to acquire most of them through simple transactions, then there seems to be a point where so few units of the currency are left that it may no longer function as money. This may be avoided by ensuring (voluntarily) that bitcoins do not fall into the wrong hands. So, are the conscious market defense mechanisms (in the context of mutually beneficial market exchanges and not, say, direct theft) enough to outweigh any major attempt to bring about bitcoin failure? I guess a better way of putting it would be to see how many major bitcoin holders are willing to purchase the stolen goods of government.

"there's no way to stop it." …accurate but this is also true of several other digital currency systems where the early adapters didn't get coins for 1/100 of a cent. To make this a success you need a liquid secondary market with 50 or 100 agents exchanging digital units for national currency and I don't see 50 agents jumping on board[yet] without them having cheap inventory of coins. Or….you need about a half million new users who just don't know any better and buy because of excitement. The guy who sold a pizza for 10,000 coins some months ago, do you really expect me to now buy those coins from him for $70,000 ? Somebody might but it won't be me:-) The structure of the system is wonderful and holds major promise, but this one is off to a bumpy start. If or when the US closes one of the large agent's bank accounts and he drops out leaving about 6 exchangers Bicoin could drop to "novelty" status. Let's give it a few more years to spread the coins out and get some exchange business going to support a liquid secondary market before we all jump for joy.

Somebody's gonna have a windfall for any successful new freely floating hard currency, and it might as well be the early adopters. After all, these tend to be the guys developing the software, creating businesses, and spreading usage. Think of it like a built-in incentive to help start up the Bitcoin economy.

But this can't take off while we wait idly by for a "few more years". It'll only be worth something in a few more years if we use it and spread its usage.

OTOH, I do agree that too fast a growth rate creates a sense of envy of the early adopters since most people don't like to see others get rich without doing any work. And the volatility can be downright scary.

The "bumpy start" is just due to it's nature as a new freely floating hard currency. I hope this is not too off putting, since a freely floating hard currency is exactly what we need…

It's not as simple as that. There are thousands of small bitcoin generators exchanging bitcoin for national currencies. Many through the big exchange at Mt. Gox <mtgox.com>, however even if Mt. Gox was shut down somehow, all the generators could still sell through forums anywhere in the world and could even hide their identities using forums on alternative networks like I2P or freenet.

Of course, no one expects you to pay US$70k for 10k of bitcoins, but many other people would be very happy to make similar exchanges at that ratio and are, in fact, doing so.

Bitcoin has the hallmarks of an excellent store of value, even more-so than precious metals. There will only EVER be 21 million bitcoins 'minted' and it is the first ever such distributed open-source digital currency. How much would you pay to own a piece of the Mona Lisa?

If governments don't find a way to shut it down, it will destroy them. If they do find a way to shut it down, then one of it's successors will destroy them, and once destroyed, the original bitcoin would come back as a rare collectors item. Think about it.

How much would that final non-governmental bitcoin be worth on exchange to the government? No government would be able to afford to buy up all bitcoins. No one anywhere ever has to exchange bitcoin for goods and services for it to have an enormous value – this is why many people who generate bitcoins sit on them and don't sell them – bitcoin is a store of value – it's more like gold than gold itself. It is the first distributed open source crypto-currency and there will only ever be 21 million bitcoins generated. How much would you pay for a share of the Mona Lisa?

Guy, every money arises out of goods in the market, like the commodities. Thats a fairly commom argument. What you dont listen very often is that it can arise from services too! Here in Brazil, during the hyper-inflation of the early 90s, my father dealt only in terms of thickets. Supermarket goods, beer thickets, and the like. But most importantly, parking thickets (with wide ranging times), hair cut thickets, cleaning services. I've even heard that at that time some prostitutes were issuing their own thickets (!!!). Seriously, i cant help my self but laught when i remerber this!

But, getting back to the bussinnes, some of this thickets became more widelly accepted than others. So they became the "standart medium of exchange", the new money. Of course, there was an incredible level of falsification, BUT this was a sort of "natural selection factor", because the thickets were becaming increasingly harder to falsify. AND most of "Public Services" were overrun by user with false thickets, so people began to start their own "public private services" IN COMPETITION WITH STATE AND CORPORATIVE BUSSINNES. The corporations, overrun and strangled by regulations and federal investigation, with those that informal economy dont have, were unable to catch up with "illegal deallers" and start firing people. Informal associations of every type were mushrooming. As the situation was becaming harder and rumors of revolution and coup JUST start spreading, it became clear that "the country needed a nacional savior". Was in this time that a new national monetary system was hotly debated. So came various "plans", and finally, Plano Real (roughly translated as "the Real Plan", with Real as the new currency). Well, that was a looong story! But the lessons that i have learned are that money can arise from services, and that alternative money has everything to do with revolution!

Now that i said all this, i want to know your opnion, folks! Just another think: why dont create money out of Online Services? That is, the same thing can be done with valuable services instead of gold or, for that matter, any material goods. And its far better than an "Alternative Digital Fiat Money"!

BTW, please be fine with me. This is my first comment ever, and english is not my native language, i just learned by myself. If this helps, i actually have just 18, but i read alot and im libertarian since 16. Thank you!

Oriom: As I understand it, the ideal way to create money is via the act of exchange itself. The exchange is "backed" by the goods and services of those engaged in it. The seller gains a credit to his account with the network and the buyer is given an equal debit, with both sides maintaining a floating balance and the network covering negative balances up to a limited amount. So people who have valuable services to offer don't have to have money as a store of value from past exchange. They create money by exchanging.
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I don't think they would have to buy all of them for such a strategy to be effective, just enough so that people would cease to use them as money. I understand the scarcity implications. Yet it seems possible (however unlikely) that Bitcoins could become just a collector's item if that route is taken. I don't see many folks trying to trade their goods for shares of the Mona Lisa (or vice versa), or suggesting to break the Mona Lisa into pieces and barter with the parts. Even if shares are being traded, it certainly doesn't seem like a feasible fix to the monetary catastrophe the world deals with today.

I'm just thinking in terms of the devil's advocate. It's not like we could just trust the current holders of bitcoins in a prima facie fashion to have such an exemplary ethical track record to not succumb to "generous" offers made on the part of unscrupulous individuals with interests to, say, destroy or control Bitcoin; especially if they are unaware of who they are actually dealing with. I just can't put it past governments to at least attempt a "book burning" of Bitcoin in some capacity or try to secure them as a reserve currency while gross acquisition is still feasible.

"No government would be able to afford to buy up all bitcoins." Ok, I assume there are anarchist bitcoin holders out there that would never knowingly sell out to the government. Yet even in this case how would you KNOW that; knowing it is possible for anonymous transactions to be made with them? Now there may be some folks out there that would never trade their bitcoins for anything and you may even be one of them, but it then only seems more like collecting ornaments (albeit expensive ones) at this point.

There are "6 million Bitcoins in circulation, with a total value of $40 million." Clearly as they were bought up the price would rise, but why does it seem so obvious that it would be impossible to acquire them all? 40, 80, 160, or 320 million usd all seem like drops in the bucket when compared to the u.s. budget. It is possible for actions such as these to be taken, as complicated and unlikely as they seem, so why such an urgency to dismiss the notion outright?

I was hoping to get more into the idea of making a concerted effort to ensure such a happening never takes place. Perhaps a seal of anarchist approval would help?

Bitcoins can be subdivided up to 7 decimal places in the current implementation, and it's technically feasible to subdivide them further with client & network upgrades without breaking the block chain (as I understand it). That means if there are 20 million bitcoins to support a 20 billion dollar economy, bitcoins will trade around 1btc:$1000. If the government buys up 3 million of the 6 million current bitcoins on the open market, the value of the remaining bitcoins will just about double to support the $40 million bitcoin market (and they'll pay around $30+ million to do it). Not a big deal. It's a deflationary currency. It's designed specifically to deal with this problem.

The real threat to the bitcoin network is to mount a massive and constant denial of service campaign, which some have calculated to cost less than $700,000 in hardware and resources right now. If bitcoin grows strong enough to withstand such an attack (the cost increases greatly as the network grows) and/or nobody feels motivated to mount one it is basically secure against all threats other than superior currencies, which we've no cause to complain about.

You wouldn't buy 10,000 bitcoins. You'd buy 3 bitcoins at $9 (or whatever the market is at) and buy a pizza with them. You're not thinking this through clearly; obviously the person who spent 10k btc for a pizza back when btc was worth a few fractions of a penny on the dollar isn't going to buy them all back now. That's not how this works. You might as well expect gas at 10c a gallon today, obstinately insisting that's what it cost in 1940, failing to understand that USD is an inflationary currency (BTC is deflationary). As to whether *you* would buy bitcoins at $9 apiece, nobody cares. Clearly somebody is buying. Something like 6 million USD ran through Mt.Gox in the past month, let alone the russian, chinese, brazilian, and other exchanges out there.

Liquidity is however something of an issue, market depth is so low it moves a great deal whenever there's a large purchase. MtGox tries to compensate for this by providing a "dark market" that doesn't move the chart for large exchanges, and that's probably where a lot of trading is going on that we don't know about (although you could infer it if you searched the block chain for large transactions).

Lol, yes, the government can regulate the exchanges, but as the bitcoin economy grows and people can receive bitcoin for services/products, the government's "regulation" will be moot. Seriously, the government can't regulate bitorrent, in spite of the laws.

Loke, what the state can do (and will) is make sure all data about the transactions is reported back to his watch dogs. And probably it dont even have to coerce people in Bitcoin to do that. Simple, if people dont have strong philosophy and moral sense, you corrupt then with promises, money, influence and power. If they dont get corrupted, you either shoot them and make it appear an accident or you manipulate people and the media create stories and "investigate" them (like Julian Paul Assange from Wikileaks, or the Dominique Strauss-Kahn, from IMF). BTW, its time of change for the global elites, so every now and then someone charged with rape. The truth, only very few know. But these stories are getting boring repetitive! *sigh*